Inflation Is Running Rampant

We’ve seen some use this report to say there is stagflation. That’s extremely wrong because this report shows the manufacturing sector is very strong. We aren’t going to have inflation like the 1970s and 1980s, but CPI should get above 3% this summer which is very high in terms of the last decade of data. Every single commodity was up in price except for propylene. A fabricated metal products firm stated, “Steel prices are crazy high. The normal checks on the domestic steel mills are not functioning — imported steel is distorted by the Section 232 tariffs.”

Warren Buffett at the Berkshire Hathaway annual meeting echoed this sentiment. It’s ironic to hear investors like Buffett say the stock market relies on low rates and add that inflation is ramping. That certainly poses a valuation risk since higher inflation can drive rates higher. In the past few weeks, the 10 year yield has been stuck in a range. If it makes a new high, valuations should fall.

Markit PMI Rises

The chart below shows the Markit manufacturing PMI increased in April unlike the ISM PMI. This PMI hit a record high as it rose from 59.1 to 60.5. Data only started being collected in May 2007 though. New order growth also hit a record high (highest in 11 years). Of course, price growth was extremely strong. Costs increased at the fastest rate since July 2008. That’s the same as the ISM’s prices index. It’s difficult to find any economic metric that shows inflation isn’t rising quickly.  

The Chief Business Economist at Markit stated, “Supply chain delays worsened, however, running at the highest yet recorded by the survey, choking production at many companies. Worst affected were consumer-facing firms, where a lack of inputs has caused production to fall below order book growth to a record extent in over the past two months as household spending leapt higher.”

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